Life and Health Insurance · Texas statutes and rules common to life and health insurance · 11 min read
Unfair claim settlement, misrepresentation and false advertising in Texas
- Identify unfair trade practices, misrepresentations, and advertising violations under Texas Insurance Code Chapter 541 and Title 28 of the Texas Administrative Code.
- Recognize prohibited claim settlement practices and explain the statutory timelines for handling, investigating, accepting, and paying claims in Texas.
- Describe the procedures, hearing rules, enforcement mechanisms, and administrative penalties used by the Texas Department of Insurance to address unfair practices.
Department Investigations, Hearings, and Enforcement
The Texas Department of Insurance may examine and investigate the affairs of any person engaged in the business of insurance in Texas to determine whether that person has engaged, or is engaging, in an unfair method of competition or an unfair or deceptive act or practice (Tex. Ins. Code §541.101). When the department has reason to believe a person engaged in the business of insurance in Texas has engaged or is engaging in Texas in a practice defined by Subchapter B, and that a proceeding is in the public interest, it must issue and serve a statement of charges and a notice stating the hearing’s time and place (Tex. Ins. Code §541.102(a)). Under Texas law, the department cannot hold this hearing before the sixth day after the date the notice is served (Tex. Ins. Code §541.102(b)).
During the hearing, the person charged is entitled to an opportunity to be heard and show cause why the department should not issue a cease and desist order (Tex. Ins. Code §541.103). Formal rules of pleading or evidence are not required at these hearings (Tex. Ins. Code §541.104(a)). Furthermore, on a showing of good cause, the department must permit any person to intervene, appear, and be heard either in person or by legal counsel (Tex. Ins. Code §541.104(b)). The department may record the hearing proceedings and evidence stenographically, and it must do so if any party requests it (Tex. Ins. Code §541.105(a)).
Witness cooperation is backed by the Texas court system. If an individual refuses to comply with a subpoena issued for a hearing or refuses to testify regarding a matter about which they may lawfully be questioned, a district court located in Travis County or in the person's county of residence may order compliance upon the department's application (Tex. Ins. Code §541.106(a)). A court may punish a failure to obey this compliance order as contempt of court (Tex. Ins. Code §541.106(b)). If an agent named Carlos is subpoenaed by the department to provide testimony regarding improper market conduct and refuses to appear, the district court can order Carlos to comply and hold him in contempt if he persists in his refusal.
When the department determines that a violation has occurred, it must issue written findings and issue a cease and desist order against the violator (Tex. Ins. Code §541.108). The department retains the power to modify or set aside all or part of that cease and desist order at any time before an appeal petition is filed (Tex. Ins. Code §541.109). If a person violates a cease and desist order, the administrative penalty assessed by the department may not exceed $1,000 for each violation or $5,000 for all violations combined (Tex. Ins. Code §541.110(c)). In a separate civil action brought by the state of Texas, a court may find a person liable for a penalty not exceeding $50, or up to $500 if the court finds the violation was wilful (Tex. Ins. Code §541.111(a)-(b)).
Common mistakes
- Assuming all claim timelines use standard calendar days instead of distinguishing between calendar days (e.g., 15 days to acknowledge a claim) and business days (e.g., 15 business days to accept or reject, 5 business days to pay).
- Believing that an insurer can demand federal income tax returns for any claim investigation, when Texas law prohibits this unless ordered by a court or involving fire loss or loss of profits or income.
- Thinking an advertisement can describe an introductory low premium as insurance without cost, which is explicitly prohibited under Texas administrative rules.
- Confusing the 30-day hearing notice required for unfair claim settlement reviews under Chapter 542 with the rule that general unfair competition hearings under Chapter 541 cannot be held before the sixth day after notice is served.
Key points
- The department investigates unfair practices and must issue a statement of charges and notice of hearing at least six days prior to holding an unfair competition hearing (Tex. Ins. Code §§541.101, 541.102(b)).
- Violating a cease and desist order under Chapter 541 subjects a person to administrative penalties up to $1,000 per violation ($5,000 total) or civil penalties up to $50 ($500 for wilful acts) (Tex. Ins. Code §§541.110(c), 541.111).
- Misrepresentation includes false statements of material fact, material omissions, and illustrations that mislead a reasonably prudent person (Tex. Ins. Code §541.061; 28 TAC §21.4(3)).
- Life insurance and annuity advertisements may not use terms such as “savings” or “investment” in a misleading context, describe a reduced initial or first-year premium as free insurance, or display a current or illustrated interest rate more prominently than a lower guaranteed rate so as to obscure the guaranteed rate (28 TAC §21.114).
- Insurers must maintain a detailed complaint record covering the prior three years or the period since the last department examination, whichever is shorter (Tex. Ins. Code §542.005(b)).
- Generally, an insurer must take the initial claim-handling steps within 15 days after notice, accept or reject within 15 business days after receiving items required for final proof of loss, and pay within five business days after notifying the claimant it will pay; the cited provisions and related sections provide exceptions and alternative deadlines.
- If no other applicable statute specifies a payment period, delaying payment for more than 60 days after receiving all reasonably requested and required items triggers the damages and other items provided by Section 542.060, subject to Section 542.058’s exceptions, including an invalid claim established through arbitration or litigation.
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